CA Resale Royalties Law Reined In by 9th Circuit

PASADENA, Calif. (CN) – The full 9th Circuit struck down a clause of a California law Tuesday that let artists collect resale royalties from companies like Sotheby’s, Christies and eBay. Judge Susan Graber penned the lead opinion, which seven colleagues joined in full, that says the artists’ claim to 5 percent royalties under California’s Resale Royalties Act violates the dormant commerce clause of the U.S. Constitution. California’s law requires a seller like eBay to pay the artist a royalty if “the seller resides in California or the sale takes place in California.” “If a California resident has a part-time apartment in New York, buys a sculpture in New York from a North Dakota artist to furnish her apartment, and later sells the sculpture to a friend in New York, the act requires the payment of a royalty to the North Dakota artist — even if the sculpture, the artist, and the buyer never traveled to, or had any connection with, California,” Graber wrote. “We easily conclude that the royalty requirement, as applied to out-of-state sales by California residents, violates the dormant commerce clause.” The “invalid clause” is severable from the remainder of the act, however, and that circumstance might not be a coincidence, the en banc court noted. “Indeed, we think that the Legislature actually foresaw the partial invalidation of the statute,” Graber wrote (emphasis in original). But Judge Stephen Reinhardt wrote in a partially dissenting opinion that the majority had decided “a question entirely unnecessary to the resolution of this case.” “To make matters worse, the majority not only decides an unnecessary, highly disputable question regarding California art owners, but it decides it incorrectly,” he said. The California statue, Reinhardt said, does not regulate the extraterritorial art sales but only those sales’ proceeds. He argued that the majority “formulates a constitutional rule far broader than is necessary.” In attempting to explain the failure to narrow the decision, “the majority ‘simply’ assumes the answer to the fundamental question in this case – whether the imposition of obligations on out-of-state agents is constitutionally indistinguishable from that state’s regulation of monetary proceeds received by its own residents,” according to the dissent. “However one may ultimately resolve that question, it is at least clear that it is a highly controversial one on which we lack clear precedent,” Reinhardt wrote. “When such a question exists, but it is not necessary to decide the case before us … we must not decide it.” Reinhardt said he views the act as regulating “the use of the money that Californians ultimately receive from the transaction – not the transaction itself, and certainly not any out-of-state transaction.” “The act is plainly a regulation of Californians’ in-state obligations — not a regulation of out-of-state entities, and not a regulation of out-of-state transactions,” he added. Reinhardt concluded that the law “imposes obligations on out-of-state entities not to serve any protectionist purpose, but rather to make the law’s valid requirement that Californians remit a portion of the proceeds they receive from art sales more effective.” “The act, in short, is simply not the type of law to which the court’s dormant commerce clause jurisprudence is primarily aimed,” he said. “It in no way provides an advantage to California residents or discriminates against out-of-state businesses, and it serves a clearly legitimate local goal – strengthening an in-state regulation benefitting the arts.” Since cases of this sort are likely to continue to arise in “our increasingly interconnected country,” Reinhardt said he has “serious doubts” that the circuit “should invalidate every state law that applies to out-of-state conduct.” Graber attempted to sideline this point by noting in the majority opinion that “the scope of our holding is neither improper nor inconsistent with the Supreme Court’s guidance.” “It is always possible to narrow a holding,” she said. But issuing an “artificially constrained opinion,” she said, “would confuse the issue and lead to judicial inefficiency.” Judge Harry Pregerson joined a separate opinion by Judge Marsha Berzon, who concurred only in part and chided the majority opinion for “unnecessarily” deciding that the act is unconstitutional as applied to out-of-state art sales conducted by California residents. The tension between the majority and Reinhardt “illustrates why we should not, in the absence of sufficient information concerning the act’s operation on out-of-state sales by California residents, determine the constitutionality of the act more generally,” Berzon added. “Consequently, I would hold the act unconstitutional as applied to out-of-state art sales by out-of-state agents, such as the New York auction houses party to this case, and go no further,” she wrote. The court remanded the case to a three-judge panel to consider remaining issues brought up by the defendants’ alternative arguments.